Artivion Inc (AORT) 2008 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the CryoLife second quarter 2008 financial conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Steven Anderson, President and Chief Executive Officer, of CryoLife. Thank you, Mr. Anderson. You may now begin.

Good morning, everyone. This is Steve Anderson, CryoLife's CEO, and I would like to welcome everyone to CryoLife's Q2 2008 and first half of 2008 conference call. With me today is Ashley Lee, the Company's Executive Vice President, CFO and COO.

This morning, we released our Q2 and first half operating results for 2008. The second quarter saw the Company set an all-time quarterly revenue record with total revenues of $27.2 million. Earnings per share for the second quarter were $0.14. Revenues for the first half of 2008 also set an all-time record of $52.7 million. BioGlue revenues of $13 million for the second quarter also set an all-time quarterly record. Ashley will get into the details of the financial performance in just a few minutes.

But first, I would like to give you the agenda for today's call. First, Ashley will discuss the Company's second quarter and first half financial performance in detail. He will also comment on the regulatory status of the use of BioGlue for browplasty, commonly known as brow lift, that is being handled by BioForm Medical. And will give you an update on the promising initial clinical outcomes related to the use of BioGlue as a hernia mesh fixation being handled by Proxy Biomedical. He will comment on the status of the approval of BioGlue in Japan and the status of the CE Mark for BioDisc in Europe.

I will discuss the recent FDA clearance of the Senographe process, decellularized pulmonary heart valve and the early marketing success we have had with this product. I will bring you up to date on our plans for the Senographe process, aortic human heart valve. I will also discuss the clinical testing program that we have set up for BioFoam surgical matrix that is being funded by the Department of Defense. I will comment on our early [anal] results for the testing the organ transport solutions that we recently licensed. I will also comment on the early marketing success we have had with Hemostase MPH, a product we began distributing recently that is a hemostatic agent for the control of bleeding. After my comments are completed, Ashley will return to give some financial guidance for the rest of the year. At this time, Ashley will review today's earnings release.

Thank you, Steve. Good morning, everyone. To comply with the Safe Harbor requirements of the Private Securities Litigation Reform Act of 1995, I would like to make the following statement. Comments made in this call which look forward in time involve risks and uncertainties and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements made as to the Company's or Management's intentions, hopes, beliefs, expectations or predictions of the future. Additional information concerning risks and uncertainties is contained from time-to-time in the Company's SEC filings including the risk factor section of our Form 10-K for the year ended December 31, 2007 and our Form 10-Q for the quarter ended June 30, 2008, which we expect to file by the end of this week and in the press release that went out this morning.

This morning, we reported our results for the second quarter of 2008. Revenues for the second quarter of 2008 increased 18% to a quarterly record of $27.2 million compared to $23 million in the second quarter of 2007. Excluding orthopedic revenues of $297,000 and $1.2 million in the second quarters of 2008 and 2007 respectively, total revenues increased 23%. Net income in the second quarter of 2008 was $3.9 million or $0.14 per basic and fully diluted common share compared to $1.3 million or $0.05 for basic and fully diluted common share in the second quarter of 2007. Net income in the second quarters of 2008 and 2007 included pretax benefits of $610,000 and $490,000 respectively related to the adjustment of reserves for product liability losses.

Revenues for the first half of 2008 increased 11% to a first half record of $52.7 million compared to $47.5 million in the first half of 2007. Excluding orthopedic revenues of $624,000 and $3.1 million in the first halves of 2008 and 2007 respectively, total revenues increased 17%. Net income in the first half of 2008 was $6.7 million or $0.24 for basic and fully diluted common share compared to $2.6 million or $0.10 for basic and $0.09 for fully diluted common share in the first half of 2007. Net income in the first half of 2008 and 2007 included pretax benefits of $530,000 and $505,000 related to the adjustment of reserves for product liability losses.

Tissue processing revenues in the second quarter of 2008 increased 17% to $13.7 million compared to $11.7 million in the second quarter of 2007. Tissue processing revenues in the first half of 2008 increased 10% to $27.1 million compared to $24.7 million in the first half of 2007. Tissue processing revenues increased primarily due to an increase in demand for the Company's cardiac and vascular process tissues, the introduction of the CryoValve SG pulmonary heart valve and price increases, partially offset by decreases in shipments of orthopedic tissue.

Cardiac revenues were $6.3 million for the second quarter of 2008 compared to $5 million in the second quarter of 2007, an increase of 26%. The increase in cardiac revenues was due to a favorable tissue mix and a 7% increase in cardiac units shipped which increased revenues by approximately 13% and an increase in average service fees which increased revenues by 13%. Cardiac revenues were $12.6 million for the first half of 2008 compared to $10 million in the first half of 2007, an increase of 26%. The increase in cardiac revenues was due to a 16% increase in cardiac units shipped which increased revenues by approximately 15% and an increase in average service fees which increased revenues by 11%. Revenues from the distribution of CryoValve SG pulmonary heart valves were $1.4 million and $1.6 million respectively for the three and six-months ended June 30th, 2008.

Vascular revenues were $7.1 million for the second quarter of 2008 compared to $5.4 million in the second quarter of 2007, an increase of 30%. The increase in vascular revenues was driven by a 26% increase in vascular unit shipments which increased revenues by 24% and by fee increases which increased revenues by 6%. Vascular revenues were $13.9 million for the first half of 2008 compared to $11.6 million in the first half of 2007, an increase of 21%. The increase in vascular revenues was driven by 16% increase in vascular unit shipments which increased vascular revenues by 16% and by fee increases which increased revenues by 5%.

Orthopedic revenues were $297,000 for the second quarter of 2008 compared to $1.2 million in the second quarter of 2007, a decrease of 76%. Orthopedic revenues were $624,000 for the first half of 2008 compared to $3.1 million in the first half of 2007, an increase-- a decrease of 80%. These decreases in orthopedic revenues were anticipated following the Company's cessation of procuring and processing orthopedic tissues on January 1 of 2007.

BioGlue revenues were a quarterly record $13 million for the second quarter of 2008 compared to $10.9 million in the second quarter of 2007, an increase of 19%. The increase was primarily due to the aggregate impact of favorable product mix and the 7% increase in the number of BioGlue milliliters shipped which increased revenues by 15%, an average increase in selling prices which increased revenues by 3% and the favorable effect of foreign exchange which increased revenues by 1%. BioGlue revenues were a record $24.9 million for the first half of 2008 compared to $22.1 million in the first half of 2007, an increase of 13%. This increase was primarily due to the aggregate impact of favorable product mix and a 2% increase in the number of BioGlue milliliters shipped which increased revenues by 9%, an increase in average selling prices which increased revenues by 3% and the favorable effect of foreign exchange which increased revenues by 1%.

Other implantable device revenues were $308,000 for the second quarter of 2008 compared to $226,000 in the second quarter of 2007. Other implantable medical device revenues were $401,000 for the first half of 2008 compared to $458,000 in the first half of 2007. Other implantable medical device revenues in the second quarter and first half of 2008 included $177,000 for Hemostase MPH which we began distributing in May.

Total product and tissue processing gross margins were 66% for the second quarter of 2008 compared to 61% in the second quarter of 2007. Total product and tissue processing gross margins were 65% for the first half of 2008 compared to 61% in the first half of 2007. Tissue processing gross margins were 46% for the second quarter of 2008 compared to 40% in the second quarter of 2007. Tissue processing gross margins were 46% for the first half of '08 compared to 41% in the first half of '07. Tissue processing gross margins improved in '08 compared to '07 primarily as a result of price increases and a favorable product mix in 2008.

General administrative and marketing expenses were $12.4 million for the second quarter of '08 compared to $10.8 million in the second quarter of '07. General administrative and marketing expenses in the second quarter of '08 and '07 included benefits of $610,000 and $490,000 respectively related to the adjustments of reserves for product liability losses. General administrative and marketing expenses were $24.4 million for the first half of '08 compared to $23.2 million in the first half of '07. General administrative and marketing expenses in the first half of '08 and '07 included benefits of $530,000 and $505,000 respectively, related to the adjustment of reserves for product liability losses.

The increase in G&A expenses for the three and six-months ended June 30, 2008 were primarily due to increases in marketing expenses. These expenses included personnel costs, corporate advertising and promotional materials to support the Company's expanded tissue, service and product offerings and revenue growth. Additionally, there were increases in stock compensation expense over the prior year periods.

R&D expenses were $1.3 million and $1 million in the second quarters of '08 and '07 respectively. R&D expenses were $2.8 and $2 million for the first half of '08 and '07 respectively. R&D spending in '08 primarily focused on the Company's Senographe products and tissues, Protein Hydrogel Technologies, and research at cold tissue-- cold storage and preservation of internal organs. You should refer to our SEC filings for detailed discussions of factors affecting our results of operations including our Form 10-Q that we plan to file by the end of this week.

As of June 30, 2008, we had $17.3 million in cash, cash equivalents and marketable securities of which $1.8 million was received from the U.S. Department of Defense as advanced funding for the development of BioFoam, Protein Hydrogel Technology, for use on the battlefield and $5 million was designated as long-term restricted money market funds as required under the Company's credit agreement.

Also have some comments on development projects. Our partner, BioForm Medical, continues to work with the FDA on the development of BioGlue for use in brow lift, cosmetic and reconstructive plastic surgery in the U.S. As we've previously announced, we did receive a CE Mark for BioGlue's use in brow lift procedures. BioForm expects to have a limited launch in BioGlue into the European market later this year. BioGlue is being distributed for use in hernia mesh fixation by Proxy Biomedical, our partner in Ireland, the U.K. and Germany. Recent presentations at the European Hernia Society meeting in [Civil] Spain and the German Hernia Society meeting in Boden, Germany concluded that the use of BioGlue for hernia mesh fixation in a sutureless tension free inguinal hernia repair is effective without early relapses. We continue to remain optimistic about BioGlue's use in hernia mesh fixation.

We continue to wait to hear from the Japanese authorities on an approval for BioGlue. The most recent inquiries from the Japanese authorities focused on the sourcing of one of the raw materials used to manufacture BioGlue. Additionally, we know that an inspection of our facilities by the Japanese authorities will likely be required prior to approval. We will keep you updated on developments as they occur.

Finally, we continue to wait for a response from our notified body about the CE Mark for Biodisc. They have our submission and we are currently waiting to hear from them. Now, I'll turn it back over to Steve.

On February 8th, the FDA cleared our CryoValve SG Senographe process decellularized pulmonary heart valve for commercial distribution. The clearance was based on data from 342 patients who had received Senographe processed heart valves and compared them to 1246 patients who had received conventionally processed CryoLife pulmonary human heart valves. The data from this patient population was the subject of a paper given on June 28th at the Western Thoracic Surgical Association meeting in Hawaii by John W. Brown, M.D., Chairman and Professor of cardiothoracic surgery at the Indiana University School of Medicine.

The results show that there was a statistically significant reduction in structural valve deterioration and valvular insufficiency in patients who receive the CryoValve SG for right ventricular outflow track reconstruction as compared to conventionally processed human valves. The data also indicated that there was a statistically significant reduction in valvular insufficiency in patients who receive the CryoValve SG as part of the Ross procedure as compared to conventionally processed human pulmonary valves. A manuscript detailing the study analysis and results has been submitted for publication to the Journal of Thoracic and Cardiovascular Surgery.

As you'll recollect from previous conference calls, since the initial implant of a Senographe processed human valve in February 2000 over 1700 Senographe processed pulmonary human valves have been implanted. Within the next two weeks, the recipient of the very first SG valve will be featured on a DVD about the CryoValve SG that you can view on our website. Senographe processing of pulmonary valves resumed immediately after the February 8th FDA clearance and the first of the SG valves was implanted in a child needing right ventricular outflow track reconstruction on March 18th of this year. Since March 18th, we have shipped about 150 SG processed valves to hospitals throughout the United States.

Currently, approximately 50% of our pulmonary valves shipped are processed using the SG process. Because of the technology used, Senographe processed valves carry a premium fee in comparison to a conventionally processed human heart valve. In June of this year, members of our staff met with FDA to discuss the data requirements for a 5 10(K) application for the Senographe process aortic human heart valve. These discussions are still ongoing. We anticipate needing to collect additional clinical data to support this application, similar to the quantity and types of data that was required for the pulmonary valve. Additional bench top testing and animal testing will also be necessary. We expect it will take about 12 to 15 months to collect and compile all this information to support the actual 5 10(K) submission.

As you'll recollect, we've been developing a BioFoam surgical matrix for the treatment of trauma with the help and funding of the Department of Defense. BioFoam is an expandable form of BioGlue that includes an expansion agent that causes the glue to expand about four times as it leaves the syringe. BioFoam looks like a lot like Ready Whip. This type of hemostatic agent appears to be appropriate for use in abdominal organ resections or lacerations. The development of this spin-off of the protein Hydrogel technology is now ready for the beginning of its regulatory submission pathway. The initial clinical indication for the use of BioFoam will be as an adjunct to control bleeding of surgically resected or lacerated abdominal organs. We have chosen this particular indication because despite improved surgical techniques, bleeding associated with segmental resection continues to be a serious complication for patients, due to the nature of the organ and the procedure.

Some of the unique features of BioFoam that we anticipate will be very helpful to the surgeon are first, fast and easy application. Second, dual mechanism of action which is surface cross linking and red blood cell aggregation. Three, an expandable and flexible matrix. And four, an appropriate and predictable degradation time. We intend to make our initial CE Mark submission for BioFoam to our European notified body during November of 2008. We expect that there will be a three to four-month review process. Therefore, we hope to receive a CE Mark for BioFoam in the European Union late in the first quarter of '09. We anticipate an initial launch of BioFoam in Europe to occur within two or three months of receipt of the CE Mark.

We'd like to report that there was an initial IDE meeting with the FDA on the 27th of August, that will assess the clinical design and animal work of our IDE for BioFoam. In the U.S., the regulatory pathway for BioFoam is an IDE/PMA. We are currently targeting a fourth quarter 2008 IDE submission for BioFoam to the FDA. We will also have to submit our requests for clinical testing separately to the Department of Defense who will also have to approve the submission. The planned human study designed for the IDE will be a multi-center randomized trial. We anticipate an enrollment of 128 patients over an eight-month timeframe. The primary end point will be a cessation of bleeding in three minutes.

At the end of last year, we licensed an organ transport solution from Trophic Solutions, a small company in Madison, Wisconsin. This technology intrigued us as early animal testing indicated that kidneys could be stored for six days in this solution, showing significant improvement of post-transplant kidneys as compared to the present industry standard, the UW solution. The early animal experienced -- experiments showed lower peak creatmun levels, faster return to function and a rapid return to normal levels. During the last conference call, we indicated that we would be testing the Trophic Transport Solution against the UW solution. This testing, to be done on a pig model, is a head-to-head comparison between the present industry standards, UW solution, machine profusion, and the Trophic Solutions technology, and we anticipate that these studies will begin in August. We expect to have our initial results back by the end of September and we will report on these results during the October conference call.

In early May, we began U.S. distribution of Hemostase MPH, a powdered hemostatic agent that complements BioGlue's surgical adhesive in intra-operative bleeding control. Sales of this product have been encouraging. As we've had revenues from Hemostase MPH of around $320,000 in the first three months which includes most of July. Because this product is new and just launched, we felt that giving our first three months of sales including most of July would be appropriate. Gross margins for this product are about 60% and as the product gains additional traction, we are optimistic that Hemostase would contribute significantly to the growth of CryoLife going forward.

Internationally, we've had some early sales success in the U.K. and in Germany. Distribution in France and Canada is scheduled to begin on September 1st. Distribution throughout the rest of Europe as well as the Americas, Australia and Asia/Pacific is scheduled to begin on January 1st, 2009. That concludes my comments. And now Ashley will return to give you some financial guidance for the rest of the year.

Our GAAP revenues are composed of tissue, processing of product revenues plus other revenues. The Company now expects tissue processing and product revenues for the full year of 2008 to be in the middle to upper end of its previously announced range of revenue guidance which is between $102 million and $107 million. Other revenues for 2008 may reach between $700,000 and $900,000 primarily related to grant revenues from Department of Defense funding in connection with the development of BioFoam. The actual amount of other revenues is largely dependent upon actual expenses incurred related to the development of BioFoam. Tissue processing revenues are expected to be between $53 million and $56 million and BioGlue revenues are expected to be between $47 million and $49 million for the full year of '08. Other implantable medical device revenues are expected to be approximately $2 million in '08, which includes an estimated $1 million in revenues from the distribution of Hemostase MPH.

Over the last couple of years, we have experienced some topline seasonality in our business. We would not be surprised to see some seasonality during the third quarter of this year but not to the extent that we've seen in the previous two years. One of the primary reasons for this seasonality is due to the summer holiday season in Europe. Also, the fourth quarter has been exceptionally strong during the last two years. Although we expect the fourth quarter and second half to be strong, the fourth quarter may not increase as much sequentially this year as it has in previous years, due primarily to the strength that we saw in the second quarter and our anticipated third quarter results.

We expect general administrative and marketing expenses of between $49 million and $51 million. I mentioned earlier that our DNA expenses increased during the second quarter, primarily due to marketing expenses. These increases are part of our new marketing campaign and increased physician education efforts as well as our plans to expand our sales force because of recent new product offerings. As part of these efforts, we will be sponsoring the Ross symposium in the fourth quarter of this year which will focus on cardiac surgical procedures. We will have a world-class faculty and expect to have more than 50 cardiac surgeons in attendance. Also, we are currently expanding our U.S. direct sales force by up to five people this year with potentially more additions in 2009. We are investing in sales, marketing and physician education in the second half of this year to better position the organization for continued sales growth in 2009 and beyond.

R&D expenses are expected to be between $6 million and $8 million for the full year of 2008. The R&D expectations include an estimated range of between $700,000 and $900,000 funded by the U.S. Department of Defense in connection with the development of BioFoam. That concludes my comments and I'll turn it back over to Steve.

At this time, I'll open up the conference call for questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Matt Dolan with Roth Capital Partners. Please go ahead with your question.

Hey, guys, good morning.

Morning.

Hey, Matt.

Congratulations on a great quarter. First question on Hemostase, can you give us kind of context within the quarter, when did the sales force, from a timing standpoint get the product in their hands? And would you say that the entire sales force had it for that period, so we can get a more normalized rate for the year?

We had the product available on May 1 but we really didn't start seeing any activity until about the middle of May. That's when we really started seeing orders come in because it was a little bit of a process to get samples out into the field and actually get in front of the docs. So, it was really the middle of May before we really saw anything. Our entire U.S. sales force has the product available to them now and we're getting a lot of new accounts and we're seeing some nice reorder rates from some of the institutions that have already ordered the product.

Okay. And then a broader question then, relative to your maintenance of the guidance although we're looking for the high end-- higher end of things now, but it seems SG pulmonary as well as Hemostase are tracking at least in line with your internal expectations initially and you maintain the guidance, if we double the first half performance, you're already above the mid-point. So, is this merely just continued conservatism or is there anything seasonally here to look forward to in the second half that we might not be factoring in?

As I mentioned a little bit earlier, Matt, we have seen some seasonality in the third quarter in particular with the holiday season in Europe. And then some people being reluctant to have some surgeries during the summer months. We have seen a little bit of seasonality. So it wouldn't surprise us if we saw a little bit in the third quarter. But certainly not to the extent that we have seen in previous years. So again, we expect to be between the mid-point and the high end of the range of revenue guidance for the year.

Okay, great. And then finally, on the R&D side, I apologize if I missed this, Steve, but any updates out of Japan? And secondly, on the ProPatch initiative, I think we were looking for a new partner there. How are those discussions going?

The-- I mentioned a little bit earlier on the call, Matt, that as it relates to Japan, we're still waiting to hear. Our partner has had some discussions with the authorities over there recently. A couple of questions that have come up are one, they want to get more comfortable on the sourcing of the bovine component of BioGlue and those discussions are ongoing. And we believe that an inspection of our facilities by the Japanese authorities will be necessary, will likely be necessary. So, those discussions are ongoing and we're just waiting to get some more resolution to those issues between our partner and the Japanese authorities.

Your second question was in regards to ProPatch. And we're not in any active discussions right now to find a partner for that particular product. What we are doing is we are in the process of conducting some large animal studies for the use of ProPatch in a complex hernia repair. Those large animal studies are ongoing. The data is encouraging and we remain optimistic that that product, ProPatch, will have a place in the complex hernia repair market and other soft tissue repairs including orthopedics. Those large animal studies are scheduled to be completed sometime during the third quarter of this year. If the results are favorable and early indications are very encouraging, we will at that point evaluate our commercialization options, potentially look for a partner. But we also have at least preliminary plans to move forward with a human study, a post-approval human study here in the U.S. using ProPatch for complex hernia repair.

Great. Thanks a lot, guys. Congrats again.

(OPERATOR INSTRUCTIONS) There are no further questions in the queue. I'd like to hand it back over to Management.

I thank you all for being with us for the second quarter conference call and we look forward to meeting with you and reporting on our third quarter, that will be coming up probably towards the end of October.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time.